DEALBOOK; Canadian Railway Clashes With Hedge Fund Investor

By IAN AUSTEN

Published: January 4, 2012

OTTAWA - The directors of the Canadian Pacific Railway have rebuked the hedge fund manager William A. Ackman, rejecting his plan to replace the rail line's chief executive with a former rival.

Mr. Ackman, whose firm Pershing Square Capital Management is the railway's largest shareholder, has vocally pushed for change at Canadian Pacific.

In October, Pershing Square called the shares ''undervalued'' and ''attractive.'' Mr. Ackman then recommended installing a new chief, E. Hunter Harrison, the former chief executive of the Canadian National Railway.

But the Canadian Pacific board balked in a letter to Mr. Ackman on Tuesday. John E. Cleghorn, Canadian Pacific's chairman, criticized Pershing Square for apparently providing information to The Globe and Mail, which led to ''inaccuracies and mischaracterizations'' in an article.

The newspaper reported that Canadian Pacific's board ''expressed enthusiasm for Mr. Harrison and requested a meeting with him.'' But Mr. Cleghorn said no invitations were extended to Mr. Harrison and cited concerns about agreements that Mr. Harrison may have with Canadian National. Mark Hallman, a spokesman for Canadian National, said that separate provisions related to Mr. Harrison's retirement benefits and pension prohibit him from competing against the railway for five years, a period that expires at the end of 2014.

In the letter, Mr. Cleghorn also took aim at Mr. Ackman. He said that said Mr. Ackman acknowledged that Pershing Square had no plan for Canadian Pacific.

Mr. Ackman shot back with his own retort on Tuesday. In a letter to Mr. Cleghorn, Mr. Ackman said Pershing Square did have a broad strategy to revamp the company, one that he said he made clear in an ''initial meeting'' and ''subsequent communications.''

''Our plan is to transform Canadian Pacific from the worst-performing railroad in North America into one of the best by effectuating a cultural and operational transformation of Canadian Pacific which begins with a new leader,'' Mr. Ackman wrote.

Mr. Harrison, whom Mr. Ackman supported in the letter, is widely admired for his work at Canadian National. He joined the company in 1998, after it acquired Illinois Central Railroad, where he had been president. Under his stewardship, Canadian National has been among the most efficient railroads in North America, keeping expenses low relative to revenue, on an operating basis.

Canadian Pacific, however, has often been one of the least efficient. Some of its problems have stemmed from costs related to harsh winter weather and steep grades on its line through Western Canada's mountains, which limit the number of cars in a train.

In a nod to Mr. Ackman, Canadian Pacific has made some changes. On Dec. 15, the company appointed Edmond L. Harris, a former senior executive at Canadian National, and Tony L. Ingram, the former chief operating officer of CSX Transportation, as board members. Mr. Ackman said he supported the additions, saying they would bring ''valuable railroad industry expertise.''

But Mr. Ackman has been less receptive to other concessions. While he said in the letter that he was ''appreciative'' of the invitation to join the board, he was unwilling to sign the associated agreements, which would require him to vote in line with the board's recommendations.

''In light of our 14.2 percent stake in the company and given Canadian Pacific's substantial underperformance over the last 10 years, I am unwilling to tie my hands,'' he said in the letter. ''I am unwilling to sign a standstill agreement, for doing so will neuter my ability to be an effective director.''

Ackman's Response to Canadian Pacific's Criticism

This is a more complete version of the story than the one that appeared in print.